Hi Guys.
A few thoughts:
1. Does it really matter a company didn’t give returns in the past?Why would I give look at past when my earnings,cashflows,business and valuation entirely depend on future expectations?? Also if it would have given robust returns or for that matter even market returns in past, Why would Rain Industries look this undervalued(or in deep value zone)! Isnt it?
2. Rain is a company that is operating as a one stop solution(CPC+CTP supplier to Aluminum and steel companies) in an oligopolistic mkt and is the supplier of essential component for the aluminium production makes it dependent on Aluminium prices (as supply increase with price rise) but even with the kind of fall in Steel and Aluminium prices the company is able to manage sales(Rain Industries sales fell less than 10%TTM but price of aluminium fell more than 20%).Commodity prices just cant fall 30% YoY forever.And even with these diminished prices of commodities,Rain made some Rs.2700crore revenue this quarter with a 14% OPM and the company has got a new capacity coming up in Russia( coal tar distillation plant) in Dec 2015.
3.The purchase of Rutgers in 2012 was planned to be structured like a leveraged buyout (LBO) when aluminium and steel prices were going up and prices were expected to remain flattish or move a little up YoY.But as it turns out the commodities had thier worst nightmare and that impacted Rain Industries and even with the fall in Al and Steel prices Rain Indistries is able to manage a good amount of revenues and OPM is increasing and introduction of Value based products is helping the company for long term and Russia will be a huge booster for capacity and revenue growth and cashflow growth. And the “Priya” cement is a popular Cement brand in South India and Cement division is performing robustly.
4. A bad business can still be a good investment.
If value investing means buying businesses for less than their intrinsic value then your chances of finding a mispriced assets are higher in a most uncertain business operating in tough business environmen. (My 7 year old nephew can do a DCF of Infosys or Accelya Kale which are long past thiere high growth periods and operating in mature businesses).Remember, even a declining business that is mispriced can still make a great investment. (Howard Marks able to make humungous monies in buying distressed assets bonds). Rain is not a distressed company or in a bad business,but it has sales that got impacted by commodity price slump which will eventually get stabilized and might as well rise in future.You cannot throw a baby out of bathing tub,and if you are true to value investing core principles,you should first value the company with all the built-in negative and positive surprises and then buy the firm when the price is substantially less than value(which i believe the case with Rain Industries). Value investing is not entirely moat investing, it is investing in anything and everything that’s mispriced and to have the ability and willingness to compute the value and then have stomach to wait and withstand for market to realise and correct the price towards your value estimate
PS: I will do a detailed post on business and valuation in future for this company
Disclosure: I am very bullish on this stock and this is my long term pick for this Diwali
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